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Rx For Survival: Treat the Causes - Not the Symptoms
Download
and Print the
Road Map discussed in this article.
Problems — in business or anywhere else — are really only solved when we get to the underlying causes. In medicine, doctors only treat the symptoms of a disease when the causes are unknown.
Business owners generally identify three major financial symptoms: low cash, low gross margin, and/or low net profit.
That's right: low cash, low gross margin or low net profits are not the causes of financial problems; they are the effects — or symptoms — of other hidden financial problems. And that's where a picture becomes useful. Because to find the underlying causes we must trace back from the effects to examine a variety of possible causes for the symptoms.
This Road Map presents just such a picture. Functionally, it represents the financial skeleton of your business. As you can see, it's a self-contained system; however, as with any system, it requires maintenance to function properly.
The Road Map presents the “big picture” overview, but at the same time leads us through a process of analysis designed to pinpoint potential problem areas. This cause-and-effect analysis has proven to be an invaluable resource for participants in our Profit Mastery Workshops and FIT Performance Groups and we think you’ll find it so as well.
Now, in order to take positive action in any situation, you need to know three things:
Where you
are | Where you want to go |
How to get there
Your own financial statements — past and present — and your own ratio benchmarks can show you your present position. By comparing your position with that of the industry as a whole, you can determine where you would like to be at the end of the next operating period. Our “Road Map” can help you determine how to get there.
Now, a few words on how to read this diagram. Between any two boxes - in the direction of the arrows - put in the the word "causes". In other words, "low cash" causes "high borrowing". Now, if you work against the arrows, include the words "is caused by" between the two boxes. For example, "high interest" is caused by "high borrowing".
Just a short word on gross margin. It's highlighted for a reason. Without an adequate margin -- long term -- you might as well hang 'em up. Not maintaining margin is almost always an issue -- direct or indirect -- in terms of problems. It's like a big star on the state map; all towns are important - but some are more important than others.
To illustrate, let’s look over the shoulder of our friend John Thomas at John Thomas Jewelers as he works his way through the
Road Map. John Thomas is a case study that we use in our 2-day Profit Mastery Workshop to illustrate common challenges. Using industry benchmarks he got at a recent financial workshop, John notes that his industry peers are achieving a gross margin of 50% compared to his 47%.
Lest you think a couple of percentage points of difference is small change, multiply John’s annual sales of $1.5 million by 3% and you’ll get $45,000 that could have dropped right to his bottom line.
Remember, to read the map, start at any box and work backward against the arrows, inserting the phrase “is caused by” between the categories in the boxes. For example:
LOW GROSS MARGIN
* is caused by *
NO CASH DISCOUNTS
LOW PRODUCTIVITY
BOOKKEEPING ERRORS
SHRINKAGE
POOR BUYING
POOR PRICING
Just a short word on “Low Gross Margin” — it's highlighted for a reason. Without an adequate margin (long-term), you may as well hang 'em up. Not maintaining margin is almost always an issue in terms of problems— direct or indirect. It's like a big star on the state map: all towns are important, but some are more important than others.
Now, let's start at “Low Cash” and take it in all directions until you've traveled through the entire system. It's a fascinating journey. Don't worry if you get strange glances as you sit there absentmindedly talking through it aloud. The key here is interdependence. When you think you've got it, try explaining it to someone else; then you'll know for sure.
Keep in mind that our financial “skeleton” is rather general: it applies to any business. Your industry may not have some of the “parts”, but don't feel cheated! Just as people come in all shapes and sizes — so do businesses. If some of these categories don't apply to you, simply leave them out. For instance, retail stores may not have accounts receivable. Just leave that part out and be glad that you have one less area to worry about managing!
Seeing the “Big Picture”
Many people visualize financial problems as isolated events. One of the best benefits of our financial cause-and-effect diagram is, in fact, to highlight the close-knit nature of the financial system in your business. Remember, this diagram doesn't care how big your business is — it works for the corner deli and it works for General Motors.
One of our FIT group members decided to use their road map to find hidden dollars in their company. So they sat down and took each item under Gross Margin and looked for ways they could save money. When they looked into bookkeeper errors, they found out that their bookkeeper was consistently filing some tax returns late, resulting in thousands of dollars in unnecessary penalty fees every year. Where are your hidden profits?
Our challenge for you is simple and straightforward: use this format to take a trip through your business. As with any trip, you can't reach your destination without a map and that's what this framework is — a financial road map. You may find that it generates more questions than it answers, but that's good — because you can't solve problems until you know what to ask and where to look!
Have a great example of how you’ve used the Road Map to find hidden dollars in your company?
Send it in and I’ll feature it in an upcoming article. |
